Tag: Chung Mong-koo

As we’ve
recounted in some detail on this site, South Korea is going through a
rough patch, economically speaking. In the decades after the Korean
War, the country grew with remarkable rapidity from an undeveloped
backwater into an international powerhouse. Leading this spectacular
advance was a relative handful of family-run conglomerates, known as
chaebols (the plural in English is often rendered as “chaebol”),
whose names – Samsung, Hyundai, etc. – have become famous around
the world.

For decades, the
chaebols were the engines of the South Korean economy. The nation’s
populace looked up to them. The dearest hope of South Korean parents
was that their kids would someday go to work for one of the chaebols.
In recent years, however, there has been a discernible shift in
public attitudes toward the chaebols. For one thing, they’ve
increasingly been seen as crowding out new businesses and thus
stifling both competition and innovation – thereby making it hard
for the South Korean economy to grow even further. For another thing,
as ordinary South Korean citizens have grown more and more accustomed
to the idea of democracy and equal treatment under the law, they’ve
also grown tired of the shameless double standards that have allowed
the chaebol dynasties to get away with corruption on a massive scale.

Moon Jae-in

When Moon Jae-in became president in 2017, he promised to clean up the chaebols. Other presidents before him had made the same promise – among them his immediate predecessor, Park Geun-hye, who is now in prison because of illegal transactions with chaebol kingpins. But Moon insisted he really intended to tackle chaebol corruption. To prove it, he put the nation’s Fair Trade Commission in the hands of a fellow named Kim Sang-jo, who called himself the “chaebol sniper.” One gathered that President Moon had put the toughest guy he could find on the job – a sort of cross between Clint Eastwood’s Dirty Harry and the Charles Bronson character in Death Wish. A fella who would make the bigwigs at Hyundai and Samsung tremble in their office towers and give them nightmares in their lavish mansions.

Kim Sang-jo

In fact, when it came to scaring the heck out of South Korea’s industrial giants, Kim
turned out to be more like Kim Novak than Clint Eastwood. As we’ve
noted, Kim, who at first came out with guns blazing, has more
recently presented himself as a “reasonable reformist” who wants
to nudge the chaebols, ever so gently, toward “evolutionary
reform.” On January 3, in response to an extensive interview with
Kim that appeared in the Korea Herald, we concluded that Kim was now yet another public official in Seoul whose posture toward the chaebols was that of a “servile brownnoser.”

Samsung honcho Jay Y. Lee being arrested last year for massive corruption; in accordance with time-honored South Korean practice, he was later given a suspended sentence

Well, it turns
out that the Korea Herald story
wasn’t the last word on Kim Sang-jo. On January 17, Kim Jaewon and
Sotaro Suzuki reported
in the NikkeiAsianReview
that the sometime “chaebol sniper” was now – gasp – actually
taking an adversarial position toward the chaebols. Or, at least,
toward the people who run them. The ruling chaebol families, said
Kim, “have lost the aggressive entrepreneurship that was shown by
the generations of their founding grandfathers and fathers.” The
current chaebol bosses, Kim continued, “were born as if they were
princes in a kingdom. As the character of the families has changed,
the decisive and quick decision-making process of the past has been
replaced by a policy that focuses on the status quo to preserve their
established power.”

True enough. Funny it took him so long to say so. Everybody else already had.

Hyundai chairman Chung Mong-koo

Kim went on to
suggest that the people who have inherited their positions of power
at the chaebols need to step down – or at least step away – from
their posts, perhaps exchanging the title of CEO for that of
Chairman, and choosing to concentrate on long-term strategy while
allowing professional managers to make day-to-day decisions.

It doesn’t
sound like a bad idea, at least to start with. But is Kim going to use his power to pressure
the chaebol dynasties to do this? Or was this simply meant to be a
modest suggestion from a man who, with every major media exposure,
seems more and more determined to project a modest image? Apparently
the latter. For Kim then went on to say: “If you thought I am a
chaebol killer, you misunderstood me. The only way to succeed in
chaebol reform is to make it predictable and sustainable.” Meaning
what? Well, one’s first reaction is that this comment seems to
have been formulated in such a way as to mean just about anything to
just about anybody. It’s not a policy statement but a political slogan, every bit as empty and
meaningless as “hope and change” or “stronger together.” No
wonder both Moon and Kim are plunging in the polls.

The current
chapter in the history of the chaebols continues to develop
in exceedingly interesting ways.

Hyundai headquarters, Seoul

As we have
been discussing on a regular basis at this site in recent
weeks, these massive, heavily diversified, internationally
famous, and family-run conglomerates – which have dominated
the South Korean economy since shortly after the Korean War,
raising the nation up from indigence to prosperity even as
its government moved gradually closer to real democracy –
have hit on challenging times. Once engines of growth, the
chaebols are now barriers to further growth, so large and
powerful that they’re capable of crushing, with little
effort, the development of new firms and stifling the spirit
of entrepreneurship.

Samsung headquarters, Seoul

As a result,
in South Korea there is hardly any way to make a
respectable career in business other than to find a job at
one of the chaebols. And however talented and motivated one
may be, there is no way to rise to the very top of one
of the chaebols unless one happens to have been born into
the right family. This state of affairs has led to growing
resentment toward the chaebols – a resentment intensified
by the corrupt ties between the chaebol dynasties and the
country’s political elites, and, perhaps most bizarre of
all, by the fact that the people who hold tight to the
reins of power in these conglomerates are not necessarily
the same people who own the lion’s share of their stock.
On the contrary, it is rare indeed for the stockholders in
the chaebols to have much say at all in their actual
management.

Moon Jae-in

As we’ve discussed here, and as Kim Jaewon noted in a recent article for Nikkei, South Korean Moon Jae-in, upon his inauguration in May 2017, promised major chaebol reform. To be sure, it is a tradition for newly installed South Korean presidents to vow chaebol reform. But Moon spoke so insistently about the matter that he persuaded a good many citizens of his country that he really meant to do something. As the weeks and months have gone by since he took power, however, fewer and fewer have looked upon his assurances with confidence; and, as the usual arrests for corruption have taken place, followed by the usual pardons for the chaebol executives involved and the usual prison terms for the politicians, once again cynicism about the chaebols has been on the upswing.

Lee Kung-hee, chairman of Samsung Electronics

It is in this atmosphere that a few bold chaebol shareholders are finally standing up to the perverse power arrangement that they have quietly accepted for so long. These activist investors, observed Jaewon, “have scored minor victories at Samsung and Hyundai, while the parent of Korean Air Lines has been called to account by a domestic fund.” At the head of the list of these investors, wrote Jaewon, is the New York-based Elliott Management, the world’s largest activist fund, which has been campaigning “to force Samsung Electronics and Hyundai Motor to increase shareholder returns.”

Hyundai Motor Chairman Chung Mong-koo

This campaign
by activist investors has already begun to bear fruit. In
early December, Samsung Electronics “retired 7% of its
common stock and 8.9% of its preferred stock worth 4.9
trillion won ($4.4 billion)” in an effort to provide
shareholders with greater benefits. Hyundai Motor recently
announced plans to “buy 2.8 million treasury shares worth
254.7 billion won by the end of February to boost its
stock price and shareholders’ value.” In December, it even
took the action – surprising within a South Korean context
– of “promoting several foreign executives to senior
roles, a first step toward the management diversification
long demanded by minority shareholders.”

Recently, we’ve been spending a lot of time here covering the chaebols, those economy-driving but corruption-ridden conglomerates that pulled South Korea out of the Third World but are now keeping its economy from shifting into even higher gear. Regular readers of this site will know that the current government in Seoul claims to be making serious efforts to reform the chaebols – but that so far there has been more big talk on this front than productive action.

Daddy Chung

As part of our attempt to educate our readers about this topic, we thought it might be advisable to take a look at some highlights of chaebol history. Today we’ll be harkening back to 2006, when Chung Mong Koo, the head of Hyundai Motor, the second largest chaebol in South Korea and (at the time) the seventh-largest carmaker in the world, and son of the man who had founded it in 1947, was arrested on charges of embezzlement and other forms of corruption.

The sum he had purportedly stolen from Hyundai was no less than 100 billion won, or $106 million. He was also accused of breach of trust for supposedly having incurred over 300 billion won, or $318 billion, in damages to the conglomerate. Moreover, government investigators had apparently uncovered evidence of “slush funds, compliant corporate boards and questionable arrangements involving affiliates that were set up to help Mr. Chung turn over the conglomerate to his son, Chung Eui Sun.”

Sonny Chung

Chung was the most powerful businessman in the country to have been arrested in a long time, and if found guilty of all charges he faced a possible life sentence. Except, of course, that he didn’t really face any such thing. The story of Chung’s brush with the law – he was sixty-eight at the time – ended up falling into the usual South Korean pattern, which can be represented by the formula A-I-R. A: arrest. I: imprisonment. R: release. Sometimes there’s a trial, and sometimes even a sentencing; sometimes these guys are pardoned before a trial can even be arranged or before a sentence can be handed down.

Chung had a trial. In February 2007, he was sentenced to three years in jail. (By this time, interestingly enough, Hyundai was being identified as the world’s sixth-largest carmaker.) The prison term came as a surprise: prosecutors had asked for six months, and it had been expected that Chung would get a suspended sentence. Certainly Chung seemed to expect that. In court, he “appeared shaken after the verdict.” He was, however, allowed to go home, prepared his appeal, and keep running Hyundai.

Hyundai headquarters, Seoul

Sure enough, as it happened, Chung stayed home. In September 2007, a three-judge panel of the Seoul High Court suspended Chung’s three-year sentence. The court’s explanation for this suspension was surprisingly frank. Presiding Judge Lee Jae-hong said that he had struggled with the decision, and had “sought the views of various people, including other judges, prosecutors, lawyers, journalists and ‘even taxi drivers and restaurant employees.’” In the end, he claimed, national interest had won the day: Chung was simply too important to South Korea’s economy not to have to go to jail. “I am also a citizen of the Republic of Korea,” he told the courtroom. “I was unwilling to engage in a gamble that would put the nation’s economy at risk.”

In a way, it was a refreshing admission. There was not the slightest pretense that the South Korean judiciary offers anything resembling equal justice for the rich and poor. No, Lee’s statement amounted to a candid acknowledgment that in South Korea, the chaebols do indeed rule.

The current South Korean corruption scandal (which we’ve been discussing this week) has blighted the images of the Brobdingnagian conglomerates – among them Samsung and Hyundai – that are known in that country as chaebols. Once admired – even revered – for helping transform South Korea into a respected powerhouse of technological production, the chaebols are now increasingly seen as oases of inherited wealth and privilege whose position of dominance and massive competitive advantage are unfair to start-up entrepreneurs and extremely unhealthful for the economy as a whole. That the chaebols have been shown again and again to be infected by immense levels of corruption at the loftiest levels has only further darkened their public image.

SK Group headquarters, Seoul

So has the staggering degree of impunity enjoyed by the highest-ranking chaebol executives and their families. As we noted in September, “however criminal or incompetent the head of a chaebol may be, he enjoys invulnerability and unaccountability on a scale unheard of in any other developed democracy.” As one South Korean businessman put it: “At companies in advanced countries, a faulty CEO is replaced. But at South Korean conglomerates, the head of a conglomerate wields absolute authority and is not replaced no matter how grievous his mistakes are.”

CJ Group headquarters, Seoul

One of the matters being investigated in connection with the current scandal is the charge that President Park Geun-hye, in 2013, ordered her then economics secretary to pressure CJ Group (one of the largest chaebols) to fire its chairwoman, Miky Lee Mie Kyung. Lee, the granddaughter of Samsung founder Lee Byung Chul, had apparently angered Park by producing entertainment programming that was “unfavourable to the government.” In a clandestinely recorded conversation, Cho darkly warned CJ Group executive Sohn Kyung Shik “that there would be consequences if the request was not followed.”

Choi Tae-won

As we’ve seen, prosecutors have been interrogating some of the top guys at the very biggest chaebols. But prosecutors aren’t the only officials who want to talk to the chaebol honchos: on November 21, the ruling and opposition parties in the South Korean parliament agreed to summon the heads of the seven largest chaebolsto testify as witnesses in that body’s own investigation of the scandal. Among them is Hyundai chairman Chung Mong-koo, who nine years ago was pardoned by then president Lee Myung-bak after being found guilty of embezzling $100 million to bribe government officials. Another prospective witness is SK Group chairman Choi Tae-won, who three years ago was pardoned by President Park after being found guilty of embezzling over $40 million. These guys, in short, are old hands at being caught with their hands in the till – and then being set free so they could resume their thievery.

Their testimonies are scheduled for the parliament’s first hearing on the scandal, on December 5; eight days later, Choi Soon-sil herself, the woman at the center of the whole shebang, will be questioned at another parliamentary hearing along with other suspected participants. We’ll be sure to keep our readers updated on developments.

Corruption scandals involving presidents and top-flight business leaders are to South Korea what coq au vin is to France. Vote-rigging allegations drove Syngman Rhee (president from 1948 to 1960) into exile in Hawaii; after they left office, both Chun Doo-Hwan (1980-88) and Roh Tae-Woo (1988-93) were tried and found guilty of mutiny, treason, and bribe-taking; Kim Young-Sam (1993-98) wasn’t jailed for corruption, but his son was; Roh Moo-Hyun (2003-08) was impeached and later committed suicide amidst bribery allegations. And that’s just a sampling.

Now, as we saw yesterday, it’s President Park Geun-hye’s turn to face the music. Choi Soon-sil, her friend of forty years, has already been taken into custody for a scheme, in which both women were involved, to squeeze money out of the huge – and hugely corrupt – conglomerates called chaebolsthat are at the heart of the country’s economy and that invariably play a big role in every major South Korean financial scandal.

Park Geun-Hye

In July of last year, according to the charges, Park met individually with the heads of the seven largest chaebolsand demanded that they fork over millions to two Choi-run institutions, the Mir Foundartion and the K-Sports Foundation. Park refuses to quit over this affair, but national outrage is mounting steadily, and opposition parties are on track to impeach her. Something’s got to give, and soon.

Naturally, the whole ugly mess has also plunged the chaebols– for what feels like the hundredth time – into yet another calamity of their own making. For them, this crisis comes at an inopportune time. They’ve already endured years of weak domestic sales and low export levels. Now, thanks to the current scandal, the possibility of serious legal consequences looms – and something close to chaos reigns. “Normally,” one leading business figure toldthe Korea Times, “companies have an idea about what their business plans will be like around this time of the year. But as far as I know, many haven’t even begun drawing up plans yet due to increasing uncertainties.”

Hyundai Chairman Chung Mong-koo

One after another, the superstars of South Korean business are being called on the carpet. On the weekend of November 12-13, prosecutors interrogated Chung Mong-koo, chair of Hyundai Motor Group, Lotte Group chairman Shin Dong-bin, and Lee Jae-yong, vice chair of Samsung (and next in line to run the whole shop) about their firms’ irregular money transfers to Choi’s foundations. Two days later, as part of a probe of a suspicious payment made by Samsung to a company owned by Choi and her daughter, hard drives and financial records were confiscated in a raid on the offices of Samsung’s advertising unit, Cheil Worldwide. It now appears that Samsung (which makes up a whopping 17% of the South Korean economy) donated a total of over $15 million to Choi’s foundations, in addition to which it reportedly offered no less than $3.1 million to pay for Choi’s daughter’s equestrian training in Germany. Yes, you read that right: $3.1 million for one person’s equestrian training.

This is, as it happens, precisely the kind of royal extravagance that has turned so many South Koreans against the self-indulgent excesses of their political and corporate elite. More on that tomorrow.

Yesterday we began looking at the chaebols, the family-controlled conglomerates that dominate the South Korean business world. Here’s a quick overview of three of the very largest chaebols. See if you notice any running themes:

Lee Kun-hee

Samsung – the largest of all the chaebols, making up no less than 17% of the South Korean economy – is chaired by Lee Kun-hee, son of the firm’s founder. Lee resigned in 2008 after being caught with a secret slush fund that he used to bribe government officials, but was pardoned by President Lee Myung-bak and promptly resumed his chairmanship. He continues to stay in office despite a book, published in 2010, that describes in detail how he stole about $9 billion of Samsung’s money.

Chung Mong-koo

Hyundai is another of the so-called “Big Four” chaebols. Its chairman, Chung Mong-koo, son of the firm’s founder, was convicted in 2007 of embezzling $100 million to bribe government officials, but he was pardoned by Lee Myung-bak and remained in office.

Choi Tae-won

Yet another one of the “Big Four,” SK Group, is chaired by Choi Tae-won, son of the group’s founder. In 2013, Choi was found guilty of embezzling over $40 million and sentenced to four years behind bars, but was pardoned by President Park Geun-hye and still runs the company.

South Koreans have – to put it mildly – mixed feelings about the families that run the chaebols. They still respect the firms’ very elderly or (mostly) deceased founders who made South Korea rich; but they increasingly resent the outrageous sense of privilege enjoyed by those founders’ children and (especially) grandchildren – who are widely resented for their unearned wealth, their princely airs, their thoroughgoing corruption, and the impunity they enjoy no matter how massive their crimes.

Koo Bon-moo, CEO of LG

The simple fact is that pretty much everybody in the South Korean government is on the chaebols’ payrolls – or wants to be. And the growing popular resentment of this grand corruption is an extremely good sign. It tells us that a people who, not so long ago, were comfortable with a degree of authoritarianism are now impatient for more democracy. People who were accustomed to class division want more equal opportunity. Though grateful to the chaebols for their contribution to South Korea’s development, they’re not happy that those chaebols have developed into arrogant aristocratic dynasties, that they use their wealth to buy off public officials, and that their domination of the economy is impeding further development.

South Korean President Lee Myung-bak

How do they impede development? Well, for one thing, they make it extremely tough for aspiring entrepreneurs to make a go of it. “It’s almost impossible for a small Korean business to take on a chaebol subsidiary – and everything is a chaebol subsidiary,” wrote one observer in 2013. The chaebols’ dominance, reported the Toronto Globe and Mail last year, “is now suffocating the country’s attempt to shift gears and foster a more innovative services-oriented economy powered by small businesses.”

Former South Korean president Roh Tae-woo

Note well: what we’re talking about here isn’t ordinary crony capitalism or the kind of revolving-door system whereby state officials often go on to become corporate execs. And vice-versa. No, it’s more as if the chaebols are a separate, permanent branch of government, whose political sway is founded partly on decades-long personal ties (Choi Tae-won’s wife is the daughter of former President Roh Tae-woo), partly on those vast slush funds that they use to grease officials’ palms, and partly on everyone’s keen awareness that the country’s fate is inextricably tied to that of the chaebols, the top ten of which account for fully 80% of South Korea’s GDP.

Entrepreneur Ahn Cheol-soo

Simply put: at times it can be hard to know where the elected South Korean government ends and the unelected government of the chaebols begins. Not only do the chaebol kings hold sway over elected officials; they also wield extraordinary power over their mid- to lower-level employees – who have little leverage at contract time, because there’s not really anyplace else for them to go. (Chaebols, according to software start-up founder Ahn Cheol-soo, treat workers like “caged animals in a zoo”.) Operating in a mind-boggling range of sectors – Samsung has its fingers in everything from financial services to shipbuilding – they have the reach and resources to effortlessly crush fledgling would-be competitors in any of them.

A graph showing Samsung’s shareholder structure

Last but not least – and this is one bizarre detail that must certainly be unique to South Korea – not even the chaebols’ boards of directors can stand up to the hegemony of the family dynasties, even if the directors hold large stakes in the firms and the latter own almost no stock at all. Indeed, a 2012 study found that eight chaebol chairmen weren’t even on their firms’ boards, meaning that they exercised enormous power without shouldering a concomitant amount of responsibility.

What this means, in practice, is that however criminal or incompetent the head of a chaebol may be, he enjoys invulnerability and unaccountability on a scale unheard of in any other developed democracy. As one South Korean business journal has put it: “At companies in advanced countries, a faulty CEO is replaced. But at South Korean conglomerates, the head of a conglomerate wields absolute authority and is not replaced no matter how grievous his mistakes are.” Or how horrendous his crimes.

A family tree showing the descendants of Samsung founder Lee Byung Chul, color-coding their involvement in different subsidiaries and their intermarriage with members of other chaebol families

No, the situation south of the DMZ isn’t remotely comparable to that in Kim Jong-un’s Hermit Kingdom. But, thanks to the chaebols, South Korea’s business community is characterized by a thuggishness, a creepiness, a crookedness, of which the outside world is almost entirely unaware. And those who continue to prop all this up – either out of some misguided sense of loyalty to dead or dying national idols, or out of sheer personal self-interest – are, quite simply, stooges, aiding and abetting a corrupt system that’s actively preventing the emergence of an even freer, more equitable, and more prosperous South Korea.